Nanosonics Set to Clean Up Globally

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With growing awareness around the globe of the need for better disinfection solutions, Nanosonics is certainly kicking goals in terms of opening up markets around the world and increasing sales, but it is time that investors saw a profit.

Medical device maker Nanosonics (NAN) may be a small Australian company, but it has high-powered support in rolling out its innovative disinfection technology: Dow Jones Industrial Average member GE signed a contract to be the exclusive US and Canadian distributor of the lead product – Trophon EPR, a point-of-care ultrasound probe disinfection unit – in early 2011, and subsequently GE’s healthymagination Fund, which invests in highly promising healthcare technology companies, invested $7.5 million in Nanosonics convertible notes, to boost the rollout of the device. GE Healthcare does not just sell the product as part of its catalogue: it set up a dedicated North American sales team to push out the device to medical facilities in the US and Canada.

The Trophon technology was a world-first for medical devices that cannot be sterilised by conventional means because of heat sensitivity. Until Trophon, ultrasound probes were disinfected with corrosive chemicals that are only about 80% efficient. Nanosonics’ biocide technology is much more efficient and environmentally friendly.

As a fully enclosed system, the Trophon system ensures operators and patients are not exposed to toxic chemicals: there is no hazardous waste to dispose of afterwards as the only by-products are oxygen and water. The technology has no competitor and stands every chance of being accepted as the global standard of care.

Trophon works to prevent Healthcare Acquired Infections (HAIs), which are infections caused by a wide variety of common and unusual bacteria, fungi, and viruses during the course of receiving medical care. HAIs are a major killer worldwide: the Center for Disease Control and Prevention (CDC) estimates that in the US alone, as many as two million people suffer from HAIs annually, resulting in more than 100,000 deaths – more people in the US than breast cancer and prostate cancer combined. That makes HIAs the fourth largest cause of fatality in the US each year.

Nanosonics says Trophon is the next generation in ultrasound probe disinfection, representing a fast, safe, eco-friendly probe disinfection. Traditional disinfectant methods use direct manual chemical processes such as soaking or spraying/wiping, which exposes the user to hazardous chemicals. In addition, the manual cleaning process present a high risk of on-going infection because of ineffective cleaning processes.

In contrast, the self-contained Trophon technology effectively disinfects the probe, including the shaft and handle, in just seven minutes between patients. The Trophon unit – which is about the size of a minibar fridge – can be wall-mounted or affixed to a mobile cart, meaning it can be operated and stored in the same room as the ultrasound system.

Since it produces no hazardous by-products or waste, the Trophon unit can be used safely into almost any exam room setting. The closed-chamber system and automated disinfectant dosage mean less wear and tear on medical capital, lower consumables cost, and no chemical exposure to facility staff, compared to current methods.

Trophon was first approved for use in Europe in 2008; it achieved US Food & Drug Administration (FDA) approval in 2011, and shortly afterward Nanosonics appointed GE as its North American distributor. Trophon has also been granted a product licence by the South Korean regulator, and has filed for regulatory approval in Mexico and Japan. Trophon is also cleared for sale in the UK and Europe (Toshiba as its non- exclusive partner in the UK, while Miele Professional fills this role in Europe), as well as Australia, Canada, Korea and New Zealand.

In August, Nanosonics received regulatory approval for Trophon in Japan, earlier than expected. The company is now finalising the Japanese product variant for introduction into manufacturing as well as its overall commercialisation strategy, and expects to enter the Japanese market in the first half of calendar 2015.

In North America, says Nanosonics, 41 of the Top 50 hospitals use Trophon, and the total number of healthcare institutes using it grew by 13% in the September 2014 quarter: there are now 1,350 hospitals and more than 1,750 healthcare centres using Trophon in North America.

In the year to 30 June 2014, Nanosonics lifted sales by 44.3%, to $21.5 million, after a 21% boost in FY13. The net loss in FY14 was cut to $2.6 million, from $4.5 million in FY13. Operating expenses rose 22%, to $20.1 million.

The June 2014 quarter saw a record quarterly sales result of $6.6 million, and Nanosonics followed that with September quarter sales of $6.01 million, up 19%. The company was cashflow-positive in the first quarter, with cash at the end of the September quarter of $23.6 million, up from $21.2 million at the end of June. The company is in a good position to ramp up marketing further – particularly with GE driving this process in the important American market.

In May, the American Institute of Ultrasound in Medicine (AIUM) updated its guidelines for cleaning and preparing external and internal use ultrasound probes between patients. The update reinforced stricter controls for high-level disinfection of ultrasound probes, and include Nanosonics’ Trophon device in its recommendations.

The AIUM is a multidisciplinary medical association of more than 9000 physicians, sonographers, scientists, students, and other health care providers, established over 50 years ago. Its guidelines are recognised and respected internationally: this is a further step towards establishing Trophon globally as the new standard of care for ultrasound probe disinfection.

The reference to Trophon in the guidelines followed inclusion of a recommendation from the Centers for Disease Control for environmental infection control in the case of clostridium difficile, bacteria that cause infectious, antibiotic-resistant abdominal pain, diarrhoea and fever, and which can cause serious problems for healthcare facilities. Trophon has been proven to effectively disinfect against C. difficile spores, which are resistant to disinfection.

In September, a European union study showed Trophon to be more effective than wipes, with a three-fold higher risk of cross-contamination using quaternary ammonium wipes – the current standard practice in much of Europe – versus using Trophon. Shortly afterward, in October, the National Health Service Wales issued guidelines that position Trophon as the “optimal solution” to ultrasound transducer disinfection.

With growing awareness around the globe of the need for better disinfection solutions, Nanosonics is certainly kicking goals in terms of opening up markets around the world and increasing sales, but it is time that investors saw a profit. Consensus expectations are that Nanosonics will break through into the black in the current financial year.

The stock has been a sound performer on the market – it is up by the equivalent of 10.1% a year over the past five years, by 20.6% a year over the past three years, and by 23.2% in the last 12 months.

Nanosonics is targeting a market that is worth $400 million a year in the US alone, with the world market split 30% North America, 34% Europe, and 36% Rest of World, and growing at a compound annual growth rate of 8%. Conservatively, Nanosonics estimates its revenue potential at about $300 million a year. That would be much higher if, as it expects, the platform Trophon technology can be extended into the urology, surgical/anaesthesia and emergency markets.

However, given the lack of profitability, Nanosonics remains a speculative buy, but it does not take much imagination to see this company gaining a kind of global reputation in imaging equipment disinfection that ResMed has in sleep-disordered breathing devices, and Cochlear has in hearing devices.

James was founding editor of Shares magazine, and oversaw one of the most successful magazine launches in Australia. He has also written for BRW, Personal Investor, The Age and Management Today, and was subsequently personal investment editor at The Australian and editor of financial website, investorweb.com.au